Public Reverse Mortgages and Long-Term Care: Can They Work Together?

Here’s the problem: By the time we need long-term care services we often don’t have readily available resources to pay for them. Only about seven million Americans have private long-term care insurance. And, on average, retirees have financial assets of less than $100,000-usually in the form of a 401(k) or other retirement plan. If a 65-year old turned that into steady monthly income, he’d get less than $600. That would pay for a home health aide for barely seven hours a week.

But Americans do have a way to fund this care: their home. Last year, we had more than $7 trillion in real estate equity, even after the crash. In 2007, nearly two-thirds of American families headed by people 62 or older owned a home free and clear But 20 percent were “cash-poor,” according to the MetLife Mature Market Institute, and could have used that equity to improve the quality of their lives.

Trouble is, two-thirds of retirees have no intention of using their homes to fund their old age. Some want to leave houses to their kids. Others don’t understand how they can tap their home equity, and others misunderstand the rules about home ownership and Medicaid.

So here’s a possible solution. What if your state, in effect, helped you turn unused home equity into cash to pay for the care you need when you become old and frail? To sweeten the deal, what if the state let you have easier access to Medicaid to supplement your own long-term care contributions?

You could use the money to make your home wheelchair accessible, or pay for a special van, or even for adult day care or that home health aide. You’d have far more flexibility than with regular Medicaid. In return for this upfront cash, your heirs would repay the state with modest interest after you die, usually by selling your house. The state wins by saving the cost of caring for you in a nursing home. You win by easily accessing the equity that could allow you to stay at home.

This program would look a lot like a reverse mortgage. With those, if you are at least 62, you can take out a loan against the equity in your home. You get either a lump sum in cash, access to a line of credit, or a regular check each month. When you move or die, you or your heirs sell the house and repay the loan plus interest.

But reverse mortgages have been a bust. In 2007, fewer than 1 percent of eligible homeowners had one. People have trouble understanding them. And they are weighed down by high fees (there is a servicing fee, an origination fee, mortgage insurance premiums, closing costs, and, of course, the interest). At the same time, a troubling number of users are relatively young borrowers who are tapping reverse mortgages to pay off credit cards or fund vacations. The perverse result: They will have even less home equity available when they really need it to pay for long-term care.

Normally, I’m no fan of the government’s doing what the market could do. Unfortunately, like long-term care insurance, private reverse mortgages are failing. A quasi-government agency might allow consumers to tap unused home equity more easily and cheaply.

In truth, states can already recover some Medicaid benefits by putting liens on the homes of Medicaid enrollees after they (and their spouses) die. But this practice is poorly understood and applied inconsistently at best. As a result, this scheme usually produces more angry families than revenue to the state.

A government reverse mortgage program would accomplish the same thing, but in a much more transparent and attractive way. States could even encourage seniors to participate in such a program by allowing them to supplement their home equity with Medicaid. Several states already operate the Partnership Program that links long-term care insurance with Medicaid. They could do the same with home equity and Medicaid.

The United Kingdom is experimenting in three localities with a somewhat different way of tying that nation’s Medicaid-like long-term care system with home “equity release.” But the idea is the same: reducing the financial burden on government-funded long-term care while giving people greater control over these services by encouraging them to use some home equity to pay for this assistance.

A few analysts are beginning to think about this in the U.S., but the idea remains half-formed. There is a lot to work out with such an arrangement, but given the poor alternatives, it may be worth thinking about.

Howard Gleckman, a resident fellow at the Urban Institute, is author of “Caring For Our Parents” and a frequent writer and speaker on long-term care issues.